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Title: GBP/USD faces fragile barricades below 1.1400 on bleak BOE outlook, risk-on still solid

October 6, 2022 12:01 AM ET

By: AnalysisWatch

The GBP/USD pair came under slight selling pressure in the Tokyo session as it tried to reach the immediate hurdle of 1.1400. Investors continued their long positions in risky currencies. The 10-year US Treasury bond yield has recovered and is now trading above 3.75%, while the S&P500 is unwilling to give up its gains and remains at high levels.

The US Dollar Index (DXY) is firmly in tow after failing to break above the immediate 111.00 hurdle. The DXY is expected to remain in limbo as investors await the release of the US Nonfarm Payrolls (NFP) to make informed decisions. As expected, the U.S. economy added 250,000 jobs, compared to the 315,000 previously reported.

It is worth noting that the U.S. economy has been operating at full employment levels in recent months. Therefore, the scope for new job creation is extremely limited. That being said, the data on average hourly earnings is of great importance. Labor cost index data is expected to remain subdued as forecasts indicate a 10 basis point (bps) decline to 5.1% on an annualized basis.

As for the UK, investors are concerned that poor economic fundamentals could drag the cable to parity. According to a Reuters poll, analysts are divided, with the results being a 3.6% stronger pound in a year and parity.

The withdrawal of the memorandum of historic tax cuts by Finance Minister Kwarteng saved the British economy from reporting the biggest increase in borrowing since 1972. But what is now haunting pound bulls is the negative outlook on the Bank of England's (BoE) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) by Fitch Ratings. The outlook, which has been revised from "stable" to "negative," affirming the AA rating, could severely impact the recent pound rally.

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